A Chapter 7 “Straight Bankruptcy” Can . . . Help You Walk Away from Your Business

Posted by Kevin on October 1, 2014 under Bankruptcy Blog | Comments are off for this article

There are pros and cons to the above statement.  That is why we say “Can Help” as opposed to “Will Help”

What happens when a small business goes under.  It usually means that not enough money is coming in to pay bills and employees (much less the owner).  This can lead to collection efforts from vendors which go from holding back product to suing the business entity and perhaps even the owner for money.  Multiple, disgruntled vendors lead to multiple, usually unwinnable lawsuits. Ultimately, you realize that you cannot stay open any longer.

Shutting down a business can be very time consuming and emotionally draining, especially when the vendors are suing the company and you.  You have to deal with vendors and suppliers, advertisers, workers, customers, etc.  You may have physical plant  which will be subject to foreclosure or tenancy action.  You may have product that needs to be liquidated.  You may need to go after accounts receivable.  That is a lot of work, and your inclination is to put everything behind you and move on.

If your business is incorporated or an LLC, it cannot receive a discharge under Chapter 7.  For that reason, many of my colleagues at NACBA believe that you should not put a small corporation (sometimes called a close corporation) or an LLC in bankruptcy.  However, if the corporation is being sued by multiple creditors and needs to be liquidated in an orderly fashion, a Chapter 7 may be helpful.  The automatic stay will stop the lawsuits.  The trustee will be responsible for the liquidation.  This can free up the owner to move on to new pursuits. (In NJ, this process can be accomplished also but means of a State court Assignment for the Benefit  of Creditors.)

On the other hand, if the corporation or LLC  is service oriented as with few assets, bankruptcy may be an unnecessary expense.

Under either scenario, a possible issue can be what to do if the principal of the corporation or LLC finds himself as a defendant in multiple lawsuits.  If the principal guaranteed the obligation, then he is SOL.  Even if principal did not guarantee, a favorite tactic of NJ collection attorneys is to sue the entity and sue the principal under theory of piercing the corporate veil.  This is usually a bogus lawsuit but requires that you interpose an answer and move for summary judgment.  This can be a major expense especially if you get sued by 10-12 aggressive creditors and may lead to consideration of filing a individual 7.  This decision, however, would have to be made on a case by case basis.

If the business entity is a sole proprietorship (d/b/a), then the debtor is really the owner.  d/b/a’s can fail for  the same reasons that close corporations or LLC’s fail.  But, in this case, it is the owner of the business that is on the hook so the owner files the Chapter 7.  Filing a Chapter 7 will stop most collection actions because of the automatic stay, and the owner/debtor can receive a discharge.  Of course, the bankruptcy will include both the business assets and the personal assets.  Most, if not all, of the business assets will probably be sold and the proceeds will be used to pay the trustee and the creditors.  The debtor is able to utilize his or her exemptions to save many of his or her personal assets such as the house, car, household furniture and furnishings, clothing and other things.

If you are running a small business that is failing, you need to speak with your accountant first, and then an experienced bankruptcy attorney.

In the next few blogs we will discuss this issue: after closing down a business and filing bankruptcy, when would Chapter 7 be adequate vs. when the extra power of Chapter 13 would be needed, in dealing with particular debt and asset issues. We’ll start the next blog on dealing with taxes.

The Widening Circles of Harm from Student Loan Debt

Posted by Kevin on June 15, 2012 under Bankruptcy Blog | Be the First to Comment

Student loans are not just burdening recent graduates. They’re now directly hurting people you wouldn’t expect. And dragging down the whole economy.

Recent college graduates are clearly hurting in this economy as they come out of school and enter the job market. The national unemployment rate has come down from the Great Recession high of 10.0% in October 2009 to 8.2% in May 2012. But it’s the persistence of extraordinarily high unemployment that is hurting young graduates. Only one other time since the Great Depression of the 1930s had the unemployment rate hit 10%, during the recession of 1981-82. But then, like in most other modern recessions, a strong recovery reduced the unemployment rate quite quickly, in that case down to 7.2% in less than two years. In contrast the current recent graduates are trying to claw their way into their first career jobs in the midst of a “jobless recovery.”

And they are forced to do so saddled under the most student loan debt ever.  You’ve probably heard the news of the past few months that total student loan debt now exceeds $1 trillion and is more than the nation’s total credit card debt. Realize that most of these graduates started college before the Great Recession hit, many heading into careers that looked relatively sensible back then but are now disaster areas. Public school teachers, anyone?

And many others made the tough decision to stay in school to ride out the recession, maybe shifting into more reliable fields, only to be confronted with one of the most anemic recoveries in modern history.

But it’s not just these twenty-something year olds who are hurting. Two other populations are being hugely impacted.

First, middle-aged students have gone back to school in a scramble to shift with the rapidly changing economy to more marketable careers. Their gamble has included taking on a huge amount of student loan debt. As the title of this Reuters article says, “Middle-aged borrowers [are] piling on student debt.” It states that in the last three years, average student loan debt has gone up 47% for the 35-to-49 year old age group, more than for any other group.

Second, just as dramatic, parents of students are taking on more and more student loan debt on behalf of their children. According to this Bloomberg article, “Loans to parents have jumped 75 percent since the 2005-2006 academic year… .  An estimated 17 percent of parents whose children graduated in 2010 took out loans, up from 5.6 percent in 1992- 1993.”

Hopefully the retrained, re-schooled middle-aged workers will find work that justifies taking out the loans. After all, the labor force has to adjust to the changing realities of the labor market, and if it does so efficiently the whole economy benefits.

And hopefully the parents’ investment in their children’s education will also be worthwhile. Their kids’ increased earning power over their lifetimes may well make it so. And you’d think that if a college student knows that his or her parents are mortgaging their home or their retirement, that student would be motivated to make good use of the education!

A title of a recent report by the National Association of Consumer Bankruptcy Attorneys asks the question squarely: “The Student Loan ‘Debt Bomb’: America’s Next Mortgage-Style Economic Crisis?

I’m a bankruptcy attorney who looks across my desk just about every day into the faces of clients whose investment in higher education did not pan out. I know that in my line of work I don’t tend to hear the success stories, but from where I’m sitting it feels like we’re heading in a dangerous direction.